Research

"The Impact of Credit Ratings on Capital Markets"  Journal of Financial Intermediation (2021)

I develop a model of investment financing which is characterized by the interaction of information asymmetry regarding the project's productivity and lack of commitment about the allocation of productive resources. This environment gives rise to a feedback effect between the decision to default and creditors' beliefs about it. I find that informative credit ratings alleviate the information asymmetry between the manager of a firm and its creditors, but strengthen (on average) the incentive to default. I characterize the conditions under which informative credit ratings worsen financing opportunities and lead to a higher expected probability of default. Finally, I study the implications for the regulation of credit rating agencies.

Presented at: European Finance Association Annual Meeting (2016), Annual Conference of the Midwest Finance Association (2016), Annual Conference of the Royal Economic Society (2015), University of Warwick (2015), European Winter Meeting of the Econometric Society (2014),  University of Amsterdam (2018)

"How Financial Markets Create Superstars"   with Vladimir Vladimirov

High valuations reflect good growth prospects but can also improve these prospects by attracting key stakeholders, such as employees, business partners, or investors. We show that this feedback channel allows speculators without positive information about a firm to profit from inflating its stock price, thereby helping the firm to "fake it till it makes it." Reversing such feedback effects is hard even when traders have negative information. Likely targets are firms in "normal" (neither hot nor cold) markets, compensating stakeholders with performance pay or equity. Investors, such as VCs, can profit from inflating firms' valuations also in private markets. 

Presented at: FSU SunTrust Beach Conference, Finance Theory Group Summer Meeting 2022, Junior Finance Symposium, FMCG conference, RSM Corporate Finance Day, Aalto University, Aarhus University, Norwegian School of Economics (NHH) ,University of Amsterdam


"Seeking Safety"  with Enrico Perotti (Revise & Resubmit, Journal of Economic Theory)

We model a structural  preference for safety as a foundation for personal investment in real and financial assets. In autarky, household seeking safety before return can invest in individual self-insurance options and risky productive assets. Private intermediaries and a minimum safe return arise endogenously to limit inefficient liquidation, with self-insured households buying bank equity to safeguard private safe debt. The endogenous conflict over interim risk choices is solved by demandable debt, forcing early liquidation in some states. Public debt can reduce the safety premium but crowds out private supply of safe claims. In contrast, deposit insurance can boost intermediation and productive investment. A safety approach to portfolio choice rationalizes puzzling empirical findings such as large differences in risky returns across the wealth distribution and extreme preferences for MMF choices since reforms eliminated the promise of safe principal. 

Presented at:  Bonn, BU, CEPR Conference on Modelling Credit Cycles, Chicago Financial Institutions Conference 2017, Columbia, EFA 2016 (Oslo), FTG Summer School 2017, Frankfurt School, Goethe, HBS, HEC Paris, Mannheim, MIT, NY Fed, NYU, Queen's, Toronto, and Yale

"Capitalizing on Crowd Capital" 

We explore how an entrepreneur can capitalize on information produced by investors and improve her financing terms, when information acquisition is costly and subject to complementarities. Under the optimal contract, investors decide sequentially whether to back the project, which is financed only if it receives enough financial support; otherwise, the entrepreneur does not raise capital. We testable insights for security-based crowdfunding (CF) that help us understand the optimal capital raising process, the channels through which it can create value, the types of projects and economic agents that would benefit from CF, and how CF relates to other sources of financing.

Presented at: Finance Theory Group, Summer Meeting (2019), Cambridge Alternative Finance Annual Conference (2019), KWC Conference on Entrepreneurial Finance (2019), European Economic Association Annual Meeting (2019), Crowdinvesting Symposium, Humboldt Berlin (2019) , Corporate Finance Day, University of Groningen (2019), University of Amsterdam (2019)

"Motivating Information Acquisition Under Delegation" 

We study a model in which a principal delegates a choice between different actions to an agent. The return from each action is unknown but the agent can invest in acquiring (noisy) information before making his choice. The principal would like the agent to invest in information but this investment is unobservable and only the chosen action and its resulting payoff  is contractible.   We solve for the optimal contract and show that it induces a contrarian bias. As the main application, we explore a setting where an analyst in a brokerage house issues financial recommendations, and argue that our findings are supported by empirical evidence on the behaviour of financial analysts.

Presented at: European Economic Association Annual Meeting (2018) , Annual Conference of the Royal Economic Society (2017), University of Amsterdam (2017), University of Oslo (2017), Goethe University Frankfurt (2017), University of Lancaster (2017), European Winter Meeting of the Econometric Society (2016), ESSEC Business School (2016), Warwick Business School (2016), CRETA Theory Conference (2016), University of Warwick (2017)

"Callable Debt as Investors' Insurance Mechanism"

We study a model where a cashless entrepreneur who is privately informed about her project’s type, seeks capital to undertake the project. We show that once we consider the entrepreneur's limited resources and experience, the optimal security is callable debt. Allowing for a call provision implies that the project is undertaken only if it is socially valuable. Thus, callable debt acts as an insurance mechanism for investors against the event of financing an entrepreneur whose project has negative NPV. Callable debt eliminates underfinancing and guarantees that projects of positive NPV are undertaken. Compared to standard debt, callable debt, strengthens the entrepreneur’s incentive to invest in the productivity of her project. 

Presented at: Goethe university Frankfurt (2017), University of Warwick (2017).

"Heterogeneity and Clustering of Defaults" with Galanis G., Karlis A., and Turner M. 

This paper studies an economy where privately informed hedge funds (HFs) trade a risky asset in order to exploit potential mispricings. HFs have access to credit, by using their assets as collateral. We analyse the role of the degree of heterogeneity among HFs’ demand for the risky asset in the emergence of clustering of defaults. We show that when the degree of heterogeneity is sufficiently high, poorly performing HFs are able to obtain a higher than usual market share at the end of the leverage cycle, which leads to an improvement of their performance. Consequently, their survival time is prolonged, increasing the probability of them remaining in operation until the downturn of the next leverage cycle. This leads to the increase of the probability of poorly and high-performing hedge funds to default in sync at a later time,and thus the probability of collective defaults.

Presented at: Computing in Economics and Finance (2014) , Tinbergen Institute (2014)  University of Warwick (2015), University College London (2015)